U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the quarterly period ended June 30, 2002
[_] Transition report under Section 13 or 15(d) of the Exchange Act For the
transition period from ____________ to ______________
Commission file number 0-29024
-------
BENTHOS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Massachusetts 04-2381876
(State or Other Jurisdiction of (I.R.S. Employer
Corporation or Organization) Identification No.)
49 Edgerton Drive, North Falmouth, Massachusetts 02556
(Address of Principal Executive Offices)
508-563-1000
Issuer's Telephone Number Including Area Code
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
State the number of shares outstanding of each of the issuer's classes of Common
equity as of the latest practicable date:
Common Stock par value $.06 2/3 1,383,082
(Class) (Outstanding stock at August 9, 2002)
Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
2
BENTHOS, INC. AND SUBSIDIARIES
FORM 10-QSB
FOR THE THIRD QUARTER AND NINE MONTHS ENDED
JUNE 30, 2002
INDEX
Page No.
Face Sheet 1
Index 2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) 3
June 30, 2002 and
September 30, 2001
Condensed Consolidated Statements of Operations (unaudited) 4
Quarter and Nine Months Ended
June 30, 2002 and
June 30, 2001
Condensed Consolidated Statements of Cash Flow (unaudited) 5
Nine Months Ended
June 30, 2002 and
June 30, 2001
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 10
of Financial Condition and Results
of Operations
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 19
Statement Pursuant to 18 U.S.C. (S)1350 19
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Benthos, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
Assets June 30, 2002 September 30, 2001
------------- ------------------
Current Assets:
Cash and Cash Equivalents $ 141 $ 46
Accounts Receivable, Net 2,654 2,723
Inventories 4,106 5,101
Prepaid Expenses and Other Current Assets 99 713
Deferred Tax Asset 1,650 1,650
-------- --------
Total Current Assets 8,650 10,233
Property, Plant and Equipment, Net 1,619 1,810
Goodwill 2,657 2,657
Other Assets, Net 1,281 1,388
-------- --------
$ 14,207 $ 16,088
======== ========
Liabilities and Stockholders' Investment
Current Liabilities:
Current Portion of Long-Term Debt $ 786 $ 786
Line of Credit -- 500
Accounts Payable 1,198 1,520
Accrued Expenses 1,918 2,329
Customer Deposits 323 161
-------- --------
Total Current Liabilities 4,225 5,296
-------- --------
Long-Term Debt, Net of Current Portion 2,488 3,077
-------- --------
Stockholders' Investment:
Common stock, $.06 2/3 Par Value-
Authorized - 7,500 Shares
Issued - 1,653 Shares at June 30, 2002
and September 30, 2001 110 110
Capital in Excess of Par Value 1,569 1,569
Retained Earnings 6,446 6,667
Treasury Stock, at Cost - 270 shares at
June 30, 2002 and September 30, 2001 (631) (631)
-------- --------
Total Stockholders' Investment 7,494 7,715
-------- --------
$ 14,207 $ 16,088
======== ========
See accompanying notes to Condensed Consolidated Financial Statements
4
Benthos, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Quarter Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
---------- ---------- --------- --------
Net Sales $ 6,132 $ 5,201 $ 14,445 $ 14,230
Cost of Sales 3,836 3,196 9,499 9,437
---------- --------- -------- --------
Gross Profit 2,296 2,005 4,946 4,793
Selling, General &
Administrative Expenses 1,374 1,528 3,897 4,208
Research and Development
Expenses 304 300 997 1,398
Amortization of Goodwill -- 66 -- 198
Amortization of Acquired Intangibles 60 61 179 181
---------- --------- -------- --------
Income (Loss) from Operations 558 50 (127) (1,192)
Interest Income 2 -- 2 27
Interest Expense (62) (90) (192) (287)
---------- --------- -------- --------
Income (Loss) before Provision
(Benefit) for Income Taxes 498 (40) (317) (1,452)
Provision (Benefit) for Income Taxes 149 (13) (96) (436)
---------- --------- -------- --------
Net Income (Loss) $ 349 $ (27) $ (221) $ (1,016)
========== ========= ======== ========
Basic Earnings (Loss) Per Share $ 0.25 $ (0.02) $ (0.16) $ (0.74)
========== ========= ======== ========
Diluted Earnings (Loss) Per Share $ 0.25 $ (0.02) $ (0.16) $ (0.74)
========== ========= ======== ========
Weighted Average
Common Shares Outstanding 1,383 1,383 1,383 1,381
========== ========= ======== ========
Weighted Average
Common Shares Outstanding,
Assuming Dilution 1,416 1,383 1,383 1,381
========== ========= ======== ========
See accompanying notes to Condensed Consolidated Financial Statements
5
Benthos, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flow
(in thousands)
(unaudited)
Nine Months Ended
June 30, 2002 June 30, 2001
----------------- ------------------
Cash Flows from Operating Activities:
Net Loss $ (221) $ (1,016)
Adjustments to Reconcile Net Loss to
Net Cash Provided by (Used in) Operating
Activities:
Depreciation and Amortization 533 866
Changes in Assets and Liabilities:
Accounts Receivable 69 (150)
Inventories 995 (950)
Prepaid Expenses and Other Current Assets 614 94
Accounts Payable and Accrued Expenses (733) 393
Customer Deposits 162 (127)
-------- ----------
Net Cash Provided by (Used in) Operating Activities 1,419 (890)
-------- ----------
Cash Flows from Investing Activities:
Purchases of Property, Plant and Equipment (148) (373)
Increase in Other Assets (87) (82)
-------- ----------
Net Cash Used in Investing Activities (235) (455)
-------- ----------
Cash Flows from Financing Activities:
(Payments) Borrowings on Line of Credit (500) 500
Payments on Long-Term Debt (589) (589)
-------- ----------
Net Cash Used in Financing Activities (1,089) (89)
-------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 95 (1,434)
Cash and Cash Equivalents, Beginning of Period 46 1,474
-------- ----------
Cash and Cash Equivalents, End of Period $ 141 $ 40
======== ==========
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 191 $ 291
======== ==========
Income Taxes Paid, Net of Refunds $ (680) $ 81
======== ==========
Supplemental Disclosure of Noncash Activities:
Issuance of Treasury Stock to the Company's ESOP $ -- $ 30
======== ==========
See accompanying notes to Condensed Consolidated Financial Statements
6
Benthos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
1. Fiscal Periods
The fiscal year of Benthos, Inc. (the Company) ends on September 30 each year.
Interim quarters are comprised of 13 weeks unless otherwise noted and end on the
Sunday closest to December 31, March 31, and June 30. All references in the
unaudited condensed consolidated financial statements to fiscal periods ended on
December 31, March 31, or June 30 mean the interim quarters referred to above.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission regarding interim financial reporting. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements and should be
read in conjunction with the consolidated financial statements and notes thereto
for the fiscal year ended September 30, 2001, included in the Company's
previously filed Form 10-KSB. The accompanying condensed consolidated financial
statements reflect all adjustments (consisting solely of normal, recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods presented. The results of
operations for the interim period are not necessarily indicative of the results
to be expected for the full fiscal year.
3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
June 30, 2002 September 30, 2001
--------------- ---------------------
Raw Materials $ 373 $ 375
Work-in-Process 3,710 4,704
Finished Goods 23 22
-------- -------
$ 4,106 $ 5,101
======== =======
4. Income (Loss) Per Share
A reconciliation of basic and diluted shares outstanding is as follows:
Quarter Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
------ ------ ------ ------
Basic weighted average common shares outstanding 1,383 1,383 1,383 1,381
Weighted average common share equivalents 33 -- -- --
------ ------ ------ -------
Diluted weighted average shares outstanding 1,416 1,383 1,383 1,381
====== ====== ====== ======
7
The following securities were not included in computing earnings per share
because their effects would be non-dilutive.
Quarter Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
----- ----- ----- -----
Options to purchase common stock 205 342 364 299
===== ===== ===== =====
5. Segment Reporting
The Company views its operations and manages its business as two segments,
Undersea Systems and Package Inspection Systems, as being strategic business
units that offer different products. The Company evaluates performance of its
operating segments based on revenues from external customers, income from
operations and identifiable assets.
Quarter Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Sales to Unaffiliated Customers:
Undersea Systems $ 4,669 $ 3,768 $ 9,660 $ 10,217
Package Inspection Systems 1,463 1,433 4,785 4,013
------- ------- -------- --------
Total $ 6,132 $ 5,201 $ 14,445 $ 14,230
======= ======= ======== ========
Income (Loss) from Operations:
Undersea Systems $ 548 $ 33 $ (353) $ (908)
Package Inspection Systems 10 17 226 (284)
------- ------- -------- --------
Total $ 558 $ 50 $ (127) $ (1,192)
======= ======= ======== ========
Identifiable Assets:
Undersea Systems $ 9,410 $ 11,864
Package Inspection Systems 2,381 3,285
Corporate Assets 2,416 1,907
-------- --------
Total $ 14,207 $ 17,056
======== ========
Revenues by geographic area were as follows:
Quarter Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
Geographic Area: ---- ---- ---- ----
United States $ 2,735 $ 3,138 $ 8,792 $ 9,425
Malaysia 2,183 -- 2,278 --
Other 1,214 2,063 3,375 4,805
-------- -------- -------- --------
Total $ 6,132 $ 5,201 $ 14,445 $ 14,230
======== ======== ======== ========
8
Revenues by product line within the Undersea Systems segment were as follows:
Quarter Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
Product Line: ---- ---- ---- ----
Underwater Acoustics $ 1,210 $ 1,594 $ 2,786 $ 4,786
Geophysical Exploration Equipment 891 1,713 3,304 4,185
Other Undersea Products 2,568 461 3,570 1,246
---------- ---------- ---------- ----------
Total $ 4,669 $ 3,768 $ 9,660 $ 10,217
========== ========== ========== ==========
The Package Inspection Systems segment has only one product line.
6. Credit Facility
The Company has a credit facility with a bank. This facility provides for loans
under two notes: a $5,500 variable rate term note and a $600 line of credit. The
term note is payable in 84 consecutive equal monthly installments of principal
with interest at prime (4.75% at June 30, 2002) plus 2%, or 7%, whichever is
higher. As of June 30, 2002, $3,274 was outstanding under the term loan. The
term note matures in August 2006. The line of credit expires on January 31,
2003. Borrowings under the line of credit are payable as follows: monthly
payments of interest only and unpaid principal and accrued and unpaid interest
at maturity. The interest rate under the line of credit is either prime (4.75%
at June 30, 2002) plus 2%, or 7%, whichever is higher. Advances are limited to
45% of eligible accounts receivable. The availability under the line of credit
was $600 as of June 30, 2002. There were no advances outstanding under the line
of credit as of June 30, 2002. The credit facility is secured by substantially
all of the assets of the Company and requires the Company to meet certain
covenants, including debt service coverage. The Company was not in conformance
with some of the covenants in the first two quarters of this fiscal year and
received waivers from the bank. As of June 30, 2002, the Company was in
compliance with the three financial covenants under this credit facility. The
Company believes that, based on its internal forecasts, it will remain in
compliance with the financial covenants. Therefore, the Company has classified
the debt outstanding under the term note that is due after June 30, 2003 as
long-term in the accompanying financial statements.
7. New Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations. SFAS No. 141 addresses changes in the financial
accounting and reporting for business combinations and supersedes APB Opinion
No. 16, Business Combinations, and SFAS No. 38, Accounting for Pre-acquisition
Contingencies of Purchased Enterprises. Effective July 1, 2001, all business
combinations should be accounted for using only the purchase method of
accounting.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". This statement applies to goodwill and intangible assets acquired after
June 30, 2001, as well as goodwill and intangible assets previously acquired.
Under this statement, goodwill as well as certain other intangible assets,
determined to have an infinite life, will no longer be amortized. Such
intangible assets will be reviewed for impairment on a periodic basis. Early
adoption of this statement is permitted for fiscal year-end companies with
fiscal years beginning after March 15, 2001 and whose first interim period
financial statements had not been issued. Pursuant to this statement, the
Company elected early adoption during the first fiscal quarter ended December
31, 2001. Accordingly, the goodwill associated with the Datasonics acquisition
is no longer subject to amortization. Such goodwill is subject to an annual
assessment for impairment by applying a fair-value based test. In the second
quarter of fiscal 2002, the Company completed its initial evaluation of its
goodwill by comparing the fair value of its reporting units, as determined by an
independent appraiser, to the reporting unit's book value. The evaluation
determined that no impairment of goodwill existed as fair value exceeded book
value for all reporting units.
9
Aggregate amortization expense related to acquired intangibles which continue to
be amortized for the quarter and nine months ended June 30, 2002 was $60 and
$179, respectively.
In the quarter ended June 30, 2001, the Company amortized $66 related to
goodwill. Excluding this amortization, the reported loss, net of taxes, would
have been reduced by $46. The basic and diluted earnings per share would have
otherwise been $0.01. For the nine months ended June 30, 2001, the Company
amortized $198 related to goodwill. Excluding this amortization, the reported
loss, net of taxes, would have been reduced by $139. The basic and diluted loss
per share would have otherwise been $(0.64).
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities. It
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. This
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company believes that this statement will not
have a material impact on its results of operations and financial position.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement supersedes FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. Under this statement
it is required that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and it
broadens the presentation of discontinued operations to include more disposal
transactions. The provisions of this statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early adoption permitted. The
Company is currently evaluating the ultimate impact of this statement on its
results of operations and financial position until such time as its provisions
are applied.
8. Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of all
components of comprehensive income ( loss). Comprehensive income (loss) is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. The
Company does not have any items of comprehensive income (loss) other than net
income (loss).
10
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Critical Accounting Policies
The preparation of our financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures. On an on-going basis, we evaluate
our estimates and assumptions, including but not limited to those related to
revenue recognition, inventory valuation, warranty reserves and the impairment
of long-lived assets, goodwill and other intangible assets. We base our
estimates on historical experience and various other assumptions that we believe
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
1. Revenue Recognition
The Company recognizes revenue from product sales upon shipment, provided that a
purchase order has been received or a contract has been executed, there are no
uncertainties regarding customer acceptance, the sales price is fixed or
determinable and collection is deemed probable. If uncertainties regarding
customer acceptance exist, the Company recognizes revenue when those
uncertainties are resolved. Amounts collected or billed prior to satisfying the
above revenue recognition criteria are recorded as deferred revenue.
2. Inventory Valuation
We value our inventory at the lower of our actual cost or the current estimated
market value. We regularly review inventory quantities on hand and inventory
commitments with suppliers and record a provision for excess and obsolete
inventory based primarily on our historical usage for the prior twelve to
twenty-four month period. Although we make every effort to ensure the accuracy
of our forecasts of future product demand, any significant unanticipated changes
in demand or technological developments could have a significant impact on the
value of our inventory and our reported operating results.
3. Warranty Reserves
Our warranties require us to repair or replace defective product returned to us
during such warranty period at no cost to the customer. We record an estimate
for warranty-related costs based on our actual historical return rates and
repair costs at the time of sale. A significant increase in product return
rates, or a significant increase in the costs to repair our products, could have
a material adverse impact on future operating results for the period or periods
in which such returns or additional costs materialize and thereafter.
4. Goodwill
The goodwill associated with the Datasonics acquisition is subject to an annual
assessment for impairment by applying a fair-value based test. In the second
quarter of fiscal 2002, the Company completed its initial evaluation of its
goodwill by comparing the fair value of its reporting units, as determined by an
independent appraiser, to the reporting unit's book value. The valuation
determined that no impairment of goodwill existed as fair value exceeded book
value for all reporting units. The valuation was based upon estimates of future
income from the reporting units and estimates of the market value of the units,
based on comparable recent transactions. These estimates of future income are
based upon historical results, adjusted to reflect our best estimate of future
markets and operating conditions, and are continuously reviewed based on actual
operating trends. Actual results may differ from these estimates. In addition,
the relevancy of recent transactions used to establish market value for our
reporting units is based upon management's judgement.
11
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(Dollars in Thousands)
Results of Operations -- Third quarter of fiscal year 2002 compared with third
quarter of fiscal year 2001.
The following table presents, for the periods indicated, the percentage
relationship of Condensed Consolidated Statements of Operations items to total
sales:
Quarter Ended
June 30, 2002 June 30, 2001
-------------- ----------------
(unaudited)
Net Sales 100.0 % 100.0 %
Cost of Sales 62.6 % 61.4 %
------------ ---------
Gross Profit 37.4 % 38.6 %
Selling, General & Administrative Expenses 22.4 % 29.4 %
Research and Development Expenses 4.9 % 5.8 %
Amortization of Goodwill -- % 1.3 %
Amortization of Acquired Intangibles 1.0 % 1.1 %
------------ ---------
Income from Operations 9.1 % 1.0 %
Interest Income -- % -- %
Interest Expense (1.0)% (1.8)%
------------ ---------
Income (Loss) Before Provision
(Benefit) for Income Taxes 8.1 % (.8)%
Provision (Benefit) for Income Taxes 2.4 % (.3)%
------------ ---------
Net Income (Loss) 5.7 % (.5)%
============ =========
The following table presents, for the periods indicated, the sales of the
product categories within the Undersea Systems segment:
Quarter Ended
June 30, 2002 June 30, 2001
---------------- -----------------
(unaudited)
Underwater Acoustics $ 1,210 $ 1,594
Geophysical Exploration Equipment 891 1,713
Other Undersea Products 2,568 461
---------- ---------
Total Undersea Systems Sales $ 4,669 $ 3,768
========== =========
12
The Package Inspection Systems segment has only one product line.
Sales. Net sales increased by 17.9% in the third quarter of fiscal year 2002 to
$6,132 as compared to $5,201 in the third quarter of fiscal year 2001. Sales of
the Undersea Systems Division increased by 23.9% to $4,669 in the third quarter
of fiscal year 2002 as compared to $3,768 in the third quarter of fiscal year
2001. This increase was primarily the result of a multi-million dollar order for
remotely operated vehicles (ROV's) to a customer in Malaysia. This increase was
offset by continued weakness in the markets served by the other lines within the
Undersea Systems Division and is a result of fewer large project orders,
decreased demand for Geophysical Exploration Equipment, consisting of
geophysical hydrophones and side scan sonar equipment, some of which is used by
the oil and gas industries, as compared with the third quarter of fiscal year
2001. Sales of the Package Inspection Systems Division increased by 2.1% to
$1,463 in the third quarter of fiscal year 2002 as compared to $1,433 in the
third quarter of fiscal year 2001.
Gross Profit. Gross Profit increased by 14.5% to $2,296 for the third quarter of
fiscal year 2002 as compared to $2,005 for the third quarter of fiscal year
2001. As a percentage of sales, gross profit was 37.4% in the third quarter of
fiscal year 2002 as compared to 38.6% in the third quarter of fiscal year 2001.
The decrease in gross profit percentage is attributed to increased sales of the
products of the Undersea Systems Division which are less profitable than those
of the Package Inspection Systems Division. The effect of this was partially
offset by a $200 reduction of a warranty reserve related to an older model
geophysical hydrophone, which had been recorded as an expense in the fourth
quarter of the prior fiscal year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 10.0% to $1,374 for the third quarter of
fiscal year 2002 as compared to $1,528 in the third quarter of fiscal year 2001.
As a percentage of sales, selling, general and administrative expenses decreased
to 22.4% in the third quarter of fiscal year 2002 as compared to 29.4% for the
third quarter of fiscal year 2001. The decrease in selling, general, and
administrative dollars is primarily a result of reduced sales commissions of
$115 and reduced headcount. There was $59 in expenses during the third quarter
of fiscal year 2001 related to the resignation of the former CEO and $85 of
provisions for bad debts in the third quarter of fiscal year 2001 related to a
former distributor. These expenses were not repeated in the third quarter of
fiscal year 2002. The decrease in percentage of sales is a result of increased
sales.
Research and Development Expenses. Research and development expenses increased
1.3% to $304 for the third quarter of fiscal year 2002 as compared to $300 in
the third quarter of fiscal year 2001. As a percentage of sales, research and
development expenses decreased to 4.9% of sales in the third quarter of fiscal
year 2002 from 5.8% in the third quarter of fiscal year 2001. The decrease in
percentage of sales is a result of increased sales.
Amortization of Goodwill. As a result of the Company's early adoption of SFAS
No. 142, Goodwill and Other Intangible Assets, goodwill, as well as certain
other intangible assets determined to have an indefinite life, will no longer be
amortized. Such intangible assets will be subject to an annual assessment for
impairment by applying a fair-value based test. Early adoption of this statement
is permitted for fiscal year-end companies with fiscal years beginning after
March 15, 2001 and whose first interim period financial statements had not been
issued. Pursuant to this statement, the Company elected early adoption during
the first fiscal quarter ended December 31, 2001. Accordingly, the goodwill
associated with the Datasonics acquisition is no longer subject to amortization.
Such goodwill is subject to an annual assessment for impairment by applying a
fair-value based test. In the second quarter of fiscal year 2002, the Company
completed its initial evaluation of its goodwill by comparing the fair value of
its reporting units, as determined by an independent appraiser, to the reporting
unit's book value. The evaluation determined that no impairment of goodwill
existed as fair value exceeded book value for all reporting units.
13
Amortization of Acquired Intangibles. Amortization of acquired intangibles was
$60 in the third quarter of fiscal year 2002 and $61 in the third quarter of
fiscal year 2001. The amortization of acquired intangibles relates to the
Datasonics acquisition in fiscal year 1999.
Interest Income. Interest income increased to $2 in the third quarter of fiscal
year 2002 as compared to $0 in the third quarter of fiscal year 2001. The
increase in interest income was a result of higher invested cash balances.
Interest Expense. Interest expense decreased to $62 in the third quarter of
fiscal year 2002 as compared to $90 in the third quarter of fiscal year 2001.
The decrease in interest expense was a result of reduced principal on the
variable rate term loan used to finance the Datasonics acquisition and lower
balances on the line of credit.
Provision (Benefit) for Income Taxes. The provision for income taxes was $149 in
the third quarter of fiscal year 2002 as compared a benefit of $13 in the third
quarter of fiscal year 2001. The effective tax rate in the third quarter of
fiscal years 2002 and 2001 was 30.0%. The rate is lower than the statutory rate
due primarily to the benefit from the Company's Foreign Sales Corporation.
14
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(Dollars in Thousands)
Results of Operations - Nine months of fiscal year 2002 compared with nine
months of fiscal year 2001.
The following table presents, for the periods indicated, the percentage
relationship of Condensed Consolidated Statements of Operations items to total
sales:
Nine Months Ended
June 30, 2002 June 30, 2001
------------------- -------------------
Net Sales 100.0 % 100.0 %
Cost of Sales 65.8 % 66.4 %
------------- -------------
Gross Profit 34.2 % 33.6 %
Selling, General & Administrative Expenses 27.0 % 29.5 %
Research and Development Expenses 6.9 % 9.8 %
Amortization of Goodwill --- % 1.4 %
Amortization of Acquired Intangibles 1.2 % 1.3 %
------------- -------------
Loss from Operations (.9)% (8.4)%
Interest Income --- % .2 %
Interest Expense (1.3)% (2.0)%
------------- -------------
Loss Before Benefit for Income Taxes (2.2)% (10.2)%
Benefit for Income Taxes (.7)% (3.1)%
------------- -------------
Net Loss (1.5)% (7.1)%
============= =============
The following table presents, for the periods indicated, the sales of the
product categories within the Undersea Systems segment:
Nine Months Ended
June 30, 2002 June 30, 2001
--------------- ---------------
(unaudited)
Underwater Acoustics $ 2,786 $ 4,786
Geophysical Exploration Equipment 3,304 4,185
Other Undersea Products 3,570 1,246
------- -------
Total Undersea Systems Sales $ 9,660 $10,217
======= =======
15
The Package Inspection Systems segment has only one product line.
Sales. Net sales increased by 1.5% in the first nine months of fiscal year 2002
to $14,445 as compared to $14,230 in the first nine months of fiscal year 2001.
Sales of the Package Inspection Systems Division increased by 19.2% to $4,785 in
the first nine months of fiscal year 2002 as compared to $4,013 in the first
nine months of fiscal year 2001. The increase resulted largely from increased
market penetration and new product introductions in the first nine months of
fiscal year 2002. Sales of the Undersea Systems Division decreased by 5.5% to
$9,660 in the first nine months of fiscal year 2002 as compared to $10,217 in
the first nine months of fiscal year 2001. This decrease was experienced in the
majority of the product lines within the Undersea Systems Division and is a
result of fewer large project orders, decreased demand for geophysical
hydrophones for use in exploration by the oil and gas industries, transition
from a distributor of the locator products in the Underwater Acoustics line and
the effects of the tragic events of September 11, 2001 on purchases of these
products by the airline industry. The decrease was partially offset by a
multi-million dollar sale of remotely operated vehicles (ROV's) to a customer in
Malaysia in April of 2002. The sales for side scan sonar equipment within the
Geophysical Exploration Equipment product line were up 9.5% as a result of
increased purchases of this equipment by the U.S. Navy and other customers as
compared to the first nine months of fiscal year 2001.
Gross Profit. Gross Profit increased by 3.2% to $4,946 for the first nine months
of fiscal year 2002 as compared to $4,793 for the first nine months of fiscal
year 2001. As a percentage of sales, gross profit was 34.2% in the first nine
months of fiscal year 2002 as compared to 33.6% in the first nine months of
fiscal year 2001. The increase in gross profit percentage is attributed
primarily to the higher sales mix of Package Inspection Systems Division
products, which carry a higher gross profit than the products of the Undersea
Systems Division and a $200 reduction of a warranty reserve related to an older
model geophysical hydrophone, which had been recorded as an expense in the
fourth quarter of the prior fiscal year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 7.4% to $3,897 for the first nine months of
fiscal year 2002 as compared to $4,208 in the first nine months of fiscal year
2001. As a percentage of sales, selling, general and administrative expenses
decreased to 27.0% in the first nine months of fiscal year 2002 as compared to
29.5% for the first nine months of fiscal year 2001. The decrease in selling,
general and administrative expenses in dollars is a result of the reduced
headcount from the first nine months of fiscal year 2001, $210 in expenses
related to the resignation of the former CEO in the first nine months of fiscal
year 2001, such as search fees for a successor and severance costs, and $85 in
bad debt provisions related to a former distributor which were not repeated in
the first nine months of fiscal year 2002.
Research and Development Expenses. Research and development expenses decreased
28.7% to $997 for the first nine months of fiscal year 2002 as compared to
$1,398 in the first nine months of fiscal year 2001. As a percentage of sales,
research and development expenses decreased to 6.9% of sales in the first nine
months of fiscal year 2002 from 9.8% in the first nine months of fiscal year
2001. The decrease in the overall level of expenditures is a result of the
completion in fiscal year 2001 of several development projects that were active
in first nine months of fiscal year 2001, the elimination of certain outside
costs that existed in the first nine months of fiscal year 2001, and the
temporary reassignment of engineering resources.
Amortization of Goodwill. As a result of the Company's early adoption of SFAS
No. 142, Goodwill and Other Intangible Assets, goodwill, as well as certain
other intangible assets determined to have an indefinite life, will no longer be
amortized. Such intangible assets will be subject to an annual assessment for
impairment by applying a fair-value based test. Early adoption of this statement
is permitted for fiscal year-end companies with fiscal years beginning after
March 15, 2001 and whose first interim period financial statements had not been
issued. Pursuant to this statement, the Company elected early adoption during
the first fiscal quarter ended December 31, 2001. Accordingly, the goodwill
associated with the Datasonics acquisition is no longer subject to amortization.
Such goodwill is subject to an annual assessment for impairment by applying a
fair-value based test. In the second quarter of fiscal year 2002, the Company
completed its initial evaluation of its goodwill by comparing the fair value of
its reporting
16
units, as determined by an independent appraiser, to the reporting
unit's book value. The evaluation determined that no impairment of goodwill
existed as fair value exceeded book value for all reporting units.
Amortization of Acquired Intangibles. Amortization of acquired intangibles was
$179 in the first nine months of fiscal year 2002 and $181 in the first nine
months of fiscal year 2001. The amortization of acquired intangibles relates to
the Datasonics acquisition in fiscal year 1999.
Interest Income. Interest income decreased to $2 in the first nine months of
fiscal year 2002 as compared to $27 in the first nine months of fiscal year
2001. The decrease in interest income was a result of lower invested cash
balances.
Interest Expense. Interest expense was $192 in the first nine months of fiscal
year 2002 as compared to $287 in the first nine months of fiscal year 2001. The
decrease in interest expense was a result of reduced principal on the variable
rate term loan used to finance the Datasonics acquisition, reduced borrowings
under the line of credit, and lower interest rates.
Benefit for Income Taxes. The benefit for income taxes decreased to $96 in the
first nine months of fiscal year 2002 as compared to $436 in the first nine
months of fiscal year 2001. The effective tax rate in the first nine months of
fiscal years 2002 and 2001 was 30.0%. The rate is lower than the statutory rate
due primarily to the benefit from the Company's Foreign Sales Corporation.
Liquidity and Capital Resources. The Company's cash and cash equivalents
increased $95 from September 30, 2001 to June 30, 2002. Cash of $1,419 was
provided by operating activities, primarily the result of changes in operational
assets and liabilities plus depreciation and amortization and offset by the net
loss incurred during the first nine months of fiscal year 2002. The Company also
used $235 and $1,089 of cash in its investing and financing activities,
respectively. Investing activities represent primarily the purchase of capital
equipment and a payment on a split-dollar life insurance policy and financing
activities represent the payment of the installment payments on the term note
and repayment under the line of credit.
The Company has a credit facility with a bank. This facility provides for loans
under two notes: a $5,500 variable rate term note and a $600 line of credit. The
term note is payable in 84 consecutive equal monthly installments of principal
with interest at prime (4.75% at June 30, 2002) plus 2%, or 7%, whichever is
higher. The term note matures in August 2006. The line of credit expires on
January 31, 2003. Borrowings under the line of credit are payable as follows:
monthly payments of interest only and unpaid principal and accrued and unpaid
interest at maturity. The interest rate under the line of credit is either prime
(4.75% at June 30, 2002) plus 2%, or 7%, whichever is higher. Advances are
limited to 45% of eligible accounts receivable. The availability under the line
of credit was $600 as of June 30, 2002. There were no advances outstanding under
the line of credit as of June 30, 2002. The credit facility is secured by
substantially all of the assets of the Company and requires the Company to meet
certain covenants, including debt service coverage. The Company was not in
conformance with some of the covenants in the first two quarters of this fiscal
year and received waivers from the bank. As of June 30, 2002, the Company was in
compliance with the three financial covenants under this credit facility. The
Company believes that, based on its internal forecasts, it will remain in
compliance with the financial covenants. Therefore, the Company has classified
the debt outstanding under the term note that is due after June 30, 2003 as long
term in the accompanying financial statements.
The Company believes it is well positioned to finance future working capital
requirements and capital expenditures during the next twelve months through cash
on hand and available credit facilities.
17
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995.
The statements in this Quarterly Report on Form 10-QSB and in oral statements
which may be made by representatives of the Company relating to plans,
strategies, economic performance and trends and other statements that are not
descriptions of historical facts are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Forward-looking information is inherently subject to risks and
uncertainties, and actual results could differ materially from those currently
anticipated due to a number of factors which include: the timing of large
project orders, competitive factors, shifts in customer demand, government
spending, economic cycles, availability of financing as well as the factors
described in this report. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results or
outcomes may vary materially from those described herein as anticipated,
believed, estimated, expected or intended.
18
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) A Special Meeting in lieu of the Annual Meeting of Shareholders of the
Registrant (the "Meeting") was held on May 3, 2002.
(b) The Registrant solicited proxies for the Meeting pursuant to Regulation
14A; there was no solicitation in opposition to management's nominees for
directors as listed in the Proxy Statement, and all such nominees were
elected.
(c) The following describes the matters voted upon at the Meeting and sets
forth the number of votes cast for, against or withheld and the number of
abstentions as to each such matter:
(i) Election of Directors:
Nominee For Withheld
Samuel O. Raymond 1,196,672 12,787
Arthur L. Fatum 1,194,848 14,611
The directors whose term of office as a director continued after the
Meeting are Stephen D. Fantone, Ronald L. Marsiglio, A. Theodore Mollegen,
Jr., and Gary K. Willis.
(ii) Authorization of appointment of Arthur Andersen LLP as independent auditors
for 2002:
For Against Abstain
1,129,973 52,496 24,990
19
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits set forth in the
Exhibit Index on the following
page are filed herewith as a
part of this report.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BENTHOS, INC.
By /s/ Ronald L. Marsiglio
Ronald L. Marsiglio
President, Chief Executive Officer,
and Director
By /s/ Francis E. Dunne, Jr.
Francis E. Dunne, Jr.
Vice President, Chief Financial Officer,
and Treasurer
(Principal Financial and Accounting Officer)
DATE: August 12, 2002
STATEMENT PURSUANT TO 18 U.S.C. (S)1350
Pursuant to 18 U.S.C. (S)1350, each of the undersigned certifies that this
Quarterly Report on Form 10-QSB for the period ended June 30, 2002 fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that the information contained in this report fairly
presents, in all material respects, the financial condition and results of
operations of Benthos, Inc.
DATE: August 12, 2002 By /s/ Ronald L. Marsiglio
Ronald L. Marsiglio
President, Chief Executive Officer,
and Director
DATE: August 12, 2002 By /s/ Francis E. Dunne, Jr.
Francis E. Dunne, Jr.
Vice President, Chief Financial Officer,
and Treasurer
(Principal Financial and Accounting Officer)
BENTHOS, INC.
EXHIBIT INDEX
Exhibit
3.1 Restated Articles of Organization (1)
3.2 Articles of Amendment dated April 28, 1997 (2)
3.3 Articles of Amendment dated April 20, 1998 (5)
3.4 By-Laws (1)
3.5 By-Law Amendments adopted January 23, 1998 (4)
4.1 Common Stock Certificate (1)
10.1 Employment Contract with Samuel O. Raymond (1)
10.2 Amendment to Employment Contract with Samuel O. Raymond (2)
10.3 Employment Contract with John L. Coughlin (1)
10.4 Amended and Restated Employment Agreement with John L. Coughlin (10)
10.5 Severance Agreement with John L. Coughlin (13)
10.6 Employment Agreement with Ronald L. Marsiglio dated May 21, 2001 (15)
10.7 Employment Agreement with Francis E. Dunne, Jr. (11)
10.8 Employee Stock Ownership Plan (1)
10.9 First Amendment to Employee Stock Ownership Plan (2)
10.10 Second Amendment to Employee Stock Ownership Plan (8)
10.11 Third Amendment to Employee Stock Ownership Plan (8)
10.12 Fourth Amendment to Employee Stock Ownership Plan (11)
10.13 Fifth Amendment to Employee Stock Ownership Plan (11)
10.14 401(k) Retirement Plan (1993)(1)
10.15 First Amendment to 401(k) Retirement Plan (2)
10.16 Second Amendment to 401(k) Retirement Plan (2)
10.17 Third Amendment to 401(k) Retirement Plan (3)
10.18 401(k) Retirement Plan (1999)(8)
10.19 First Amendment to 1999 401(k) Retirement Plan (11)
10.20 Second Amendment to 1999 401(k) Retirement Plan (11)
10.21 Third Amendment to 1999 401(k) Retirement Plan (14)
10.22 Supplemental Executive Retirement Plan (1)
10.23 1990 Stock Option Plan (1)
10.24 Stock Option Plan for Non-Employee Directors(1)
10.25 1998 Non-Employee Directors' Stock Option Plan (4)
10.26 Benthos, Inc. 2000 Stock Incentive Plan (9)
10.27 License Agreement between the Company and The Penn State Research
Foundation dated December 13, 1993 (1)
10.28 Technical Consultancy Agreement between the Company and William D.
McElroy dated July 12, 1994 (1)
10.29 Technical Consultancy Agreement between the Company and William D.
McElroy dated October 1, 1996 (3)
10.30 General Release and Settlement Agreement between the Company and
Lawrence W. Gray dated February 8, 1996 (1)
10.31 Line of Credit Loan Agreement between the Company and Cape Cod Bank and
Trust Company dated September 24, 1990, as amended (1)
10.32 Commercial Mortgage Loan Extension and Modification Agreement between
the Company and Cape Cod Bank and Trust Company, dated July 6, 1994 (1)
10.33 Credit Agreement between the Company and Cape Cod Bank and Trust
Company dated August 18, 1999 (8)
10.34 First Amendment to Credit Agreement dated March 23, 2001 (14)
10.35 Second Amendment to Credit Agreement dated December 12, 2001. (17)
10.36 License Agreement between the Company and Optikos Corporation dated
July 29, 1997 (3)
10.37 Hydrophone License Agreement between the Company and Syntron, Inc.
dated December 5, 1996 (6)
10.38 Amendment Number 1 to Hydrophone License Agreement between the Company
and Syntron, Inc. dated September 11, 1998 (6)
10.39 Asset Purchase Agreement among Benthos, Inc., Datasonics, Inc., and
William L. Dalton and David A. Porta (7)
10.40 Settlement Agreement and Mutual Release dated October 18, 2001 between
the Company and RJE International, Inc (16)
10.41 Amendment and Termination of Consulting Agreement between the Company
and William D. McElroy dated February 15, 2002 (18)
21 Subsidiaries of the Registrant (1)
(1) Previously filed as an exhibit to Registrant's Registration
Statement on Form 10-SB filed with the Commission on December 17, 1996
(File No. O-29024) and incorporated herein by this reference.
(2) Previously filed as an exhibit to Registrant's Quarterly Report
on Form 10-QSB for the quarterly period ended March 30, 1997 (File No.
O-29024) and incorporated herein by this reference.
(3) Previously filed as an exhibit to Registrant's Quarterly Report
on Form 10-QSB for the quarterly period ended June 29, 1997 (File No.
O-29024) and incorporated herein by this reference.
(4) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended December 31, 1997
(File No. O-29024) and incorporated herein by this reference.
(5) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended March 31, 1998 (File
No. 0-29024) and incorporated herein by this reference.
(6) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended December 31, 1998
(File No. 0-29024) and incorporated herein by this reference.
(7) Previously filed as an exhibit to Registrant's Current Report on
Form 8-K filed on or about August 27, 1999 (File No. 0-29024) and
incorporated herein by this reference.
(8) Previously filed as an exhibit to Registrant's Annual Report on
Form 10-KSB for the fiscal year ended September 30, 1999 (File No.
0-29024) and incorporated herein by this reference.
(9) Previously filed as an exhibit to the Registrant's definitive
proxy statement filed on Schedule 14A on or about January 18, 2000 and
incorporated herein by this reference.
(10) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended December 31, 1999
(File No. 0-29024) and incorporated herein by this reference.
(11) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended June 30, 2000 (File
No. 0-29024) and incorporated herein by this reference.
(12) Previously filed as an exhibit to the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended September 30, 2000 (File No.
0-29024) and incorporated herein by this reference.
(13) Previously filed as an exhibit to Amendment No. 1 to the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
September 30, 2000 (File No. 0-29024) and incorporated herein by this
reference.
(14) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended March 31, 2001 (File
No. 0-29024) and incorporated herein by this reference.
(15) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended June 30, 2001 (File
No. 0-29024) and incorporated herein by this reference.
(16) Previously filed as an exhibit to the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended September 30, 2001 (File No.
0-29024) and incorporated herein by this reference.
(17) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended December 31, 2001
(File No. 0-29024) and incorporated herein by this reference.
(18) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended March 31, 2002 (File
No. 0-29024) and incorporated herein by this reference.